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Should I own or should I lease? An economist’s thoughts on land reform in Kazakhstan.

If the government plans to give you the possibility to own the land that you have been farming for generations, would you go on the street in protest, facing the risk of detention? You may think this is a rhetorical question, but that is exactly what happened in Kazakhstan last year. The government announced a reform that would allow auction of agricultural land, which until then could only be leased. In response to the protests, the government put the reform on a five-year hold and started a consultation process, and suggested that the main reason for the moratorium is to update the country cadastre.[1] So why did the farmers protest? To understand this, I suggest we look more closely at what this reform was really about: namely the redistribution of property rights.

It is undoubtedly the case that property rights have rich cultural, social, legal, and economic connotations. Cultural and historical explanations of the opposition to the proposed reform certainly resonate with anyone familiar with Central Asia. Private ownership of land is a relatively new concept in this part of the world. In the not-so-distant nomadic past of Kazakhstan, land was for communal use and no private property right over land existed, in contrast to livestock that represented the key element of individuals’ wealth. Subsequently, Kazakhstan’s experience within the Soviet Union meant that land was nationalised, thus belonging to everybody.

From an economist point of view, nevertheless, it is difficult to rationalise the protesters’ behaviour. For a farmer, land ownership appears clearly preferable to leasing. Indeed, ownership implies that when making investment decisions where substantial setup costs and return lags are involved, a resource user benefits from a long-term horizon to depreciate the costs and reach maximum benefit. Land is classified as a renewable resource but land productivity is largely determined by users’ practices. Therefore, continuous control over land use should be the key to enabling the farmers to reap the full fruits of their labour over generations.

The above holds, however, only if, (1) the famer has access to the necessary financial capital, and (2) if she has trust in the property rights allocation mechanism, and in an effective enforcement of property rights. Access to financial capital is necessary to acquire the land in the first place. The allocation of the land to its most productive users, therefore, depends on the existence of well-functioning financial markets. From this point of view, one may see the protests as evidence exposing the inadequacy of the current level of financial intermediation to support the expansion of property rights.

For the first issue, data from the World Bank’s Global Financial Development indicators suggest that access to financial markets may not have been the reason for this protest. Private credit by deposit money banks and other financial institutions as a percentage of GDP – an indicator often used to measure the depth of the financial sector – in Kazakhstan has increased from less than 10% to about 50% between 2000 and 2009. Over the same period, this indicator among Low & Middle Income countries increased from 17% to 26%. Despite the drop in the indicators value since 2010, the most recent data indicates that private credit still accounts for at least 36% of GDP in Kazakhstan, which is greater than the average for the reference group of countries. Furthermore, institutions specialising in extending credit specifically to the agricultural sector already exist in Kazakhstan.

This of course is not to say that access to financial capital is without limitations, as according to an OECD report from 2011, the agricultural sector struggles with low levels of productivity, for example. From this perspective, however, one would think that, rather than representing a significant obstacle to land privatization in Kazakhstan, the greater opportunities for investment and innovation that diffused ownership provides would be seen as a positive opportunity to increase productivity and ease the financial constraints.

Looking at the second issue – the allocation mechanism — the fear might have been that the people who will end up owning the land are not the people who would be the best stewards of the land. People in Kazakhstan may well be justified to be doubtful of any centrally run privatisation efforts, given the bad press the 1990s wave of privatisation received, in terms of corruption and ineffectiveness.

There is, however, one remaining issue to consider, which refers to what happens when property rights are lawfully terminated. There are clear cases when property rights over land may be lawfully terminated, for example due to “national interest” (also sometimes referred to as eminent domain). In these cases, the law is very clear on the amount of compensation the rightful owners may be awarded.

Interestingly, in the same circumstances an individual who is leasing rather than owning the land is entitled to in-kind compensation in the form of an equivalent plot of land, instead. The cases when rightful expropriation of land can occur are not different in Kazakhstan to those in many other countries. What may be particular for an emerging economy, a dynamic environment where big infrastructure project are put in place to boost the economy, international links, and attractiveness to foreign capital is that the “national interest” may be invoked more frequently than in more mature economies. This discrepancy in the compensation rights of owners and leasers may have been a non-trivial driver for the protests. Ironically, it may demonstrate that individuals perceive their access to land, and the possibility of their continued livelihood, as more protected in the case when they lease the land than when they own it.

As it has been concluded in so many occasions before, the analysis of the proposal for land reforms in Kazakhstan and the public response to that reveals that policy changes do not happen in a vacuum but need to take into account the economic and institutional context.